Lakeland Industries Inc (LAKE) 2007 Q2 法說會逐字稿

Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical facts which reflect management's expectations regarding future events and operating performance and speak only as of today, September 7, 2006.

Forward-looking statements are based on current assumptions and analysis made by the Company in light of its experience and its perception of historical trends, [inaudible] conditions, expected future developments and other factors it believes are appropriate under circumstances.

These statements are subject to a number of assumptions, risks and uncertainties and factored in the Company's filings with the Securities and Exchange Commission, general economic and business conditions, the business opportunities that may be presented to you and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company.

Listeners are cautioned that these statements are not guarantees of future performance and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributable to the Company or person acting on its behalf are expressively qualified in their entirety by these cautionary statements.

At this time, I would like to introduce your host for this call, Lakeland Industries President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Good afternoon, gentlemen.

I'll start out with a little recap, but going forward, sales growth in our second quarter ended July 31, 2006 FY '07 decreased in a number of areas from last year, primarily in the Tyvek disposable Tychem chemical suits and fire products. The decrease was $2,066,000 somewhat offset by an increase in international high visibility clothing and glove sales of $1,063,000, leaving us with a net 4% decrease in sales.

Chemical sales decreased due to a continuing lull in spending in our homeland security chemical suit business, which is highly dependent on federal, state and municipal spending patterns which are quite difficult to predict.

The 2002 Fire Act grants have been consistently spent by the fire departments since the first Fire Act grants were dispersed beginning in early 2003 on our chemical suit products. However, that spending decreased in the beginning of 2005 as pipelines filled and large portions of new Fire Act cash grants were delayed in this calendar year and will not be disbursed until October 2006.

The most significant shortfall in anticipated governmental spending comes from the Bioterrisom Act of 2002 grants and spending programs which monies are largely still logjammed in state bureaucracies so we are not expecting much here for the remainder of the year in the chemical suit business. We, however, did increase our gross margins by 3.7% to 26.8% from 23.1% last year, mainly due to our large purchases last year of raw materials before prices were increased.

Secondarily to our cost-cutting initiatives and the addition of the Mifflin Valley acquisition, along with the reassignment to personnel from cost of goods sold department to SG&A department to more accurately reflect job functions.

Sales of our Tyvek disposal garments were down due to a surplus of Tyvek in the distribution channels. We feel that most of this surplus has worked its way through the market as of this date as our disposable sales for August were up almost 10% compared against last year's August sales.

Tychem chemical suit sales, however, are down, as mentioned above, because government spending on these products have been down for the last six months. Unlike fashion apparel, our protective garments do not change in fabric content or pattern style and have a five-year shelf life so obsolescence is not a risk factor in running down inventories.

We should be able to adjust our disposable inventories within our next three months given the recent uptick in the disposable sales in August. Our disposable inventory reduction is more of a timing challenge in adjusting raw material buying and garment production to market demand, not an obsolescence or write-down problem.

The only negative is the additional interest carrying costs. Thus we will be adjusting downwardly our raw material inventories between now and October 31, 2006 toward much more normal levels.

Bank debt as of July 31, 2006 was $7,054,000 but as of today, it's only $3.2 million. We're down some $3.8 million, reflecting this adjustment to our raw material buying over the last 40 days. We expect these debt and inventory trends to continue out to the end of our third quarter ended October 31, 2006.

Relief from declining sales in chemical suits can only be hoped for in the fourth quarter once delayed portions of the Fire Act monies are released, and there's no guarantee that such monies will be allocated toward our products, being chemical suits, as opposed to another areas such as vehicles or fire prevention and education or other products or services that these monies can be spent on.

Although gross margins increased due to prebuying of raw materials and other factors we just discussed above, nonetheless, operating margins decreased for the six months and three months ended July 31, 2006 as clearly outlined in the press release issued earlier today. So we'll take any questions on that later.

Looking to the future, we expect our third quarter gross margins to be impacted due to the gyrating costs of raw materials as they float through our FIFO-based inventory. The reverse will be true in our fourth quarter as lower cost raw materials aggressively purchased from March to June of this year roll through our sales process in the fourth quarter.

So we are looking for sales to make a slight recovery in the third quarter but with lower gross margins due to higher raw material costs and a decent recovery in sales in the fourth quarter but combined with better margins in the fourth quarter due to lower raw material costs. Of course we are disappointed with the sales slowdown in the second quarter, but our long-term plans, which span the next three years and which, on a large part, are responsible for the current increased operating expenses, cannot be sacrificed for an obsession with the next quarter's results.

As I stated in our letter to shareholders distributed in May 2006 this will be a year of transition. It will include expanding our international sales line. This resulted in operating expense increases tied to opening new sales offices in China, Japan and Chile simultaneously over the last six months.

It also included acquiring product lines that we do not carry presently. The addition of new lines of gloves in India, again, increased expenses and will continue do so for the next four to six quarters.

I also outlined that we planned on developing new proprietary products. This cost is reflected in the increase in sales, salaries and commission expenses to support the introduction of these new lines over the next three years.

The implementation of the e long-term strategies is why we resist the temptation to manage earnings or to give earnings guidance. What we seek to do and, more importantly, execute on is to make strategic, long-term decisions that maximize long-term expected value, even at the expense of lowering near-term earnings.

This also means making acquisitions that maximize expected long-term value even as the expense of lowering near-term earnings, India and the other glove investments being the prime examples here.

We did not make money in our first two years in China in 1996 and 1997, but that investment laid the basis for our continued existence as seven of our competitors bit the dust between 1996 and 2001 and thereafter, China provided the basis for repeated annual double-digit earnings growth from 2000 until 2005.

As the Chinese [R&B] increases against the dollar, we have to look to other low-wage countries with weaker currencies like India. Not only does such an investment diversify our labor and currency risks, but it also opens up a platform to sell our products into the fastest growing, large economy after China.

An investment in salesforce precedes actual sales growth. Increased sales just do not happen by themselves, particularly in our industry where end users require a lot of hand holding and technical proof and support before switching to a new product. Thus our investment in sales personnel.

Although our stock has dipped and rallied countless times over the last 15 years, nonetheless, the long-term trend has been from approximately $0.50 a share to today's price, and our goal is to repeat that performance over the next 10 to 15 years. We also intend to provide investors with more value relevant information. You will see much more detail in our MV&A this quarter and more key metrics in our financial information in the future.

So with that, I will turn it over to Gary Pokrassa, our CFO.

Thanks, Chris, and good afternoon, ladies and gentlemen.

We have changed our conference call format. Rather than my reading off a history of our metrics, we have expanded our press release to include a detailed table of historic metrics by quarter. I hope everyone has had a chance to read through this history.

Let me just emphasize that our aggressive materials purchasing has directly resulted in improved margins. The increased costs from the purchases last December through this February will be rolling through cost of goods sold through about mid-September and then we expect the benefit from the recent round of discounted purchase, which is would reduce the cost of goods sold, from about mid-September through roughly at January year-end.

With that, we'll turn it over for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from Mr. Alan Kaplan, private investor. Please go ahead.

Hi. I had a couple of questions.

Did I hear you say that disposable sales, you expect to go up in the fourth quarter or total sales?

Disposable sales.

And why specifically in the fourth quarter?

Well, we're seeing an uptick in disposable sales right now in August.

Yeah.

We're basically anticipating disposable sales to come off a low trend because for most of spring and part of the summer, the channel was stuffed with a lot of disposable garments so sales downtrended during those periods. When we see an uptick of about 10% in August, which is a pretty slow month historically and seasonally over last year, I think it portends for a return to more normal sales.

Okay.

And I noticed in the last earnings release for Alpha Protek that they were expecting their disposable sales to go up because I think they have a very good new line of disposables. Have you looked at their stuff and is it really an improvement?

I haven't looked at their stuff recently. We sell both Tyvek and other alternatives. I believe they only sell alternatives. They sell it into primarily the hospital market.

I see.

So a lot of their disposables are geared, the patterns and the styles are geared toward medical as opposed to industrial, which is where we live.

Okay.

And my last question, I guess I was hoping that there would be multi-nationals who would be buying some of your garments in the international areas but I guess that's not true?

Well, that's what we're aiming to do. That's why we opened up sales and distribution facilities in China, Japan, Chile, literally in the last six months.

Yeah, I guess, though, I mean you wouldn't have -- if they're customers in the U.S., you wouldn't have to do much convincing. I guess that's why.

Well no, you still have Chinese buyers in China even though they're working for Hewlett-Packard or IBM. The nature of these type of sales is that they have to get comfortable with the fabric that they're using and the application that it's being used in.

So you first of all have to visit the guy three or four times before you, you know, get an order and then it's a test market order. And then they'll test it for six months to see if it actually works in their application as opposed to the competitive fabric. So these sales just don't happen overnight.

Okay.

Well, let me just say, I like the fact that you've expanded your press release and if you would just eliminate the 10% stock dividends, I'd really be happy.

Well, you know, half the shareholder base wants it and the other half doesn't.

Okay. All right. Thanks.

[OPERATOR INSTRUCTIONS] There appear to be no further questions at this time. And would I like to turn the floor back to Mr. Christopher Ryan for his closing comments. Oh, we do have a question. Mr. Matthew Miller from [Cantiler] Holdings. Please go ahead.

Good afternoon, gentlemen.

Wonder if you could talk a little bit about what the pricing environment looked like in the latter half of the second quarter? Remember there and then the first quarter perhaps into the early second quarter, there were some pricing issues due to some of the things that your suppliers were doing. I wonder if you could talk about that.

Well basically, prices weaken when there's a surplus of anything in any market.

Right.

Okay? So prices weakened because there was not a lot of demand because of the surplus in the market. It's demand and supply, there was an oversupply, prices were weak, basically, since last March.

Okay. So the entirety of the second quarter was pretty weak?

We're pretty certain as the surplus has worked itself out simply as we see our August sales go up.

Okay. Great. That was it. Appreciate it.

Okay.

Thank you. There appear to be no further questions at this time.

Okay. Then I will close off the session and wish everybody a good weekend.

Thank you. This concludes today's Lakeland Industries Incorporated second quarter 2007 earnings conference call. You may disconnect your lines at this time and have a wonderful evening.